Merrill Lynch admits to misleading customers and agrees to pay $42 million penalty

The SEC entered an order charging Merrill Lynch, Pierce, Fenner & Smith with misleading customers about how it handled their orders in violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act. Merrill Lynch agreed to settle the charges, admit wrongdoing, and pay a $42 million penalty (In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Release No. 33-10507, June 19, 2018).

Masking and false reports. According to the SEC’s order, Merrill Lynch falsely informed customers that it had executed millions of orders internally when it actually had routed them for execution at other broker-dealers, including proprietary trading firms and wholesale market makers ("External Liquidity Providers" or "ELPs"). Merrill Lynch called this practice "masking", and it entailed reprogramming the company’s systems to falsely report execution venues, altering records and reports, and providing misleading responses to customer inquiries. According to the order, by masking the broker-dealers who had executed customers’ orders, Merrill Lynch made itself appear to be a more active trading center and reduced access fees it typically paid to exchanges.

Customer impact. Merrill Lynch masked the ELP executions of the firm’s "direct strategy access" (DSA) customers. These customers typically were financial institutions such as asset managers, mutual fund investment advisers, and public pension funds. Moreover, Merrill Lynch received DSA customer orders and typically sliced them into smaller "child" orders that it routed to various trading centers, including exchanges, Alternative Trading Systems (ATSs), and ELPs. During the five years that masking was in place (2008-2013), Merrill Lynch’s DSA customers received more than 15.8 million child order executions at ELPs. These transactions involved more than 5.4 billion shares and had a notional value of over $141 billion. Merrill Lynch falsely reported to customers that all of these transactions occurred at Merrill Lynch.

The order noted that as a result of Merrill Lynch’s masking practice, Merrill Lynch’s customers did not know that some of their orders were executed at ELPs; and other orders were exposed to ELPs before being executed at other venues. These customers wanted to know, and expected Merrill Lynch to inform them, if Merrill Lynch sent their orders to ELPs. Accordingly, this information was material. Additionally, certain customers used the execution venue information provided by Merrill Lynch to assess its performance and make strategic choices about their broker-dealer relationships and tactical routing decisions. Certain customers were also concerned that orders routed to ELPs could be subject to information leakage.

Further deception. After Merrill Lynch stopped its masking practices in May 2013, it did not inform customers about its past practices, but rather took additional steps to hide its misconduct. Instead, Merrill Lynch configured systems so that future reports to customers, typically provided on a monthly or quarterly basis, and continued to mask ELP executions that occurred prior to May 2013. More than 30 percent of the total number of subsequently identified masked executions occurred from May 2012 through May 2013.

Enforcement officials’ comments. Joseph Sansone, Chief of the SEC’s Enforcement Division’s Market Abuse Unit noted, "Institutional traders often make careful choices about how and where their orders are sent out of a concern for information leakage…[b]ecause of masking, customers who had instructed Merrill Lynch not to route their orders to third-party broker-dealers did not know that Merrill Lynch had disregarded their instructions."

Stephanie Avakian, Co-Director of the SEC’s Enforcement Division had this to say about Merrill Lynch’s conduct, "By misleading customers about where their trades were executed, Merrill Lynch deprived them of the ability to make informed decisions regarding their orders and broker-dealer relationships." She added, "Merrill Lynch, which admitted that it took steps to ensure that customers did not learn about this misconduct, fell far short of the standards expected of broker-dealers in our markets."

Interested in submitting an article?

Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on securities regulation legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.

Create a PasswordPlease enter a PasswordYour password must be at least 6 characters longNo validation was done for leading or trailing spaces in password.

Yes, I would like to create an account.

I consent to the collection of my personal information by Wolters Kluwer Legal & Regulatory U.S., operated through CCH Incorporated and its affiliate Kluwer Law International, so that I can create an account to store my contact information and order history to facilitate ecommerce transactions. I understand that my personal information will be processed for this purpose in the United States where CCH Incorporated operates.

You may change or withdraw your consent at any time by contacting our Customer Service team at +1-301-698-7100 or [email protected]. For more information about our privacy practices, please refer to our privacy statement: www.WoltersKluwerLR.com/privacy.

Online subscription product purchases require that you create an account.

Email Address
This field is required
Please Type Valid Email Address
Email Address has a minimum length of 0.
Company
This field is required
Country
This field is required

Yes, send me information on similar products and content from Wolters Kluwer.

I consent to the collection of my personal information by Wolters Kluwer Legal & Regulatory U.S., operated through CCH Incorporated and its affiliate Kluwer Law International, so that I can be contacted about similar product(s) and content. I understand that my personal information will be processed for this purpose in the United States where CCH Incorporated operates. Additionally, if the products being inquired about are fulfilled by Kluwer Law International, my personal information will be shared with Kluwer Law International and processed in the Netherlands or the United Kingdom where it operates.

You may change or withdraw your consent at any time by contacting our Customer Service team at +1-301-698-7100 or [email protected]. For more information about our privacy practices, please refer to our privacy statement: www.WoltersKluwerLR.com/privacy.

Thank you!

We apologize!

Interested in submitting an article?

First Name
This field is required

Last Name
This field is required

Email Address
This field is required
Please Type Valid Email Address
Area of Expertise
This field is required
Article Idea for Consideration
This field is required

Yes, send me information on similar products and content from Wolters Kluwer.

I consent to the collection of my personal information by Wolters Kluwer Legal & Regulatory U.S., operated through CCH Incorporated and its affiliate Kluwer Law International, so that I can be contacted about similar product(s) and content. I understand that my personal information will be processed for this purpose in the United States where CCH Incorporated operates. Additionally, if the products being inquired about are fulfilled by Kluwer Law International, my personal information will be shared with Kluwer Law International and processed in the Netherlands or the United Kingdom where it operates.

You may change or withdraw your consent at any time by contacting our Customer Service team at +1-301-698-7100 or [email protected]. For more information about our privacy practices, please refer to our privacy statement: www.WoltersKluwerLR.com/privacy.

Success

We appologize

Request Free Trial

Thank you for your interest in a free trial! We look forward to connecting with you.

First Name
This field is required

Last Name
This field is required

Email Address
This field is required
Please Type Valid Email Address
Phone Number
This field is required
Title (Optional)Company Name
This field is required
Organization Type
This field is required
Country
This field is required
State or Province
This field is required

Yes, send me information on similar products and content from Wolters Kluwer.

I consent to the collection of my personal information by Wolters Kluwer Legal & Regulatory U.S., operated through CCH Incorporated and its affiliate Kluwer Law International, so that I can be contacted about similar product(s) and content. I understand that my personal information will be processed for this purpose in the United States where CCH Incorporated operates. Additionally, if the products being inquired about are fulfilled by Kluwer Law International, my personal information will be shared with Kluwer Law International and processed in the Netherlands or the United Kingdom where it operates.

You may change or withdraw your consent at any time by contacting our Customer Service team at +1-301-698-7100 or [email protected]. For more information about our privacy practices, please refer to our privacy statement: www.WoltersKluwerLR.com/privacy.

Thank you!

We aplogize!

Message Us

Thank you for your inquiry! We look forward to connecting with you.

First Name
This field is required

Last Name
This field is required

Email Address
This field is required
Please Type Valid Email Address
Phone Number
This field is required
Company Name
This field is required
Country
This field is required
Topic (Optional)Account or Invoice Number (Optional)Comments (Optional)

Thank you. We will contact you soon!

We apologize, but we failed to receive this message.

Thank You!

Thank You.

Your request has been forwarded to a Wolters Kluwer representative who will contact you shortly!